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How Warren Buffett’s strategy can help investors to capitalise on a market crash

Peter Stephens
·3-min read
close-up photo of investor Warren Buffett
close-up photo of investor Warren Buffett

Warren Buffett has a long track record of capitalising on stock market downturns. As such, it could be a good idea for investors to follow his advice as the prospect of a second market crash remains strong.

The ‘Sage of Omaha’s’ long-term approach and focus on high-quality companies may help him in identifying the best investment opportunities while other investors are selling stocks. Over time, this may lead to market-beating returns.

Warren Buffett’s long-term approach

Warren Buffett’s time horizon is exceptionally long. In fact, his favoured holding period is said to be “forever“. As such, he is unlikely to become too concerned about a temporary decline in stock prices. A market crash may feel as though it could last in perpetuity. But the reality is that no market downturn has ever continued without eventually becoming a bull market.

Therefore, adopting a long-term view may help an investor to look beyond short-term chaos in order to buy the best companies on offer. Certainly, it is extremely difficult to know when a market downturn will come to an end. However, indexes such as the FTSE 100 and S&P 500 have always recovered from their declines to post new record highs. Investors who purchase undervalued stocks and hold them for the long run stand a good chance of generating impressive returns as the economy recovers.

If Warren Buffett took a short-term view of his portfolio, he would not be in a position to take advantage of a market crash. Instead, he would probably react to short-term market movements. This could lead to losses because of the unpredictable nature of stock prices over a short time horizon.

Buying high-quality stocks

Warren Buffett also buys high-quality companies in a market crash. They are more likely to overcome potential economic challenges and weak operating conditions than their peers. This may be because they have a more solid financial position or a clear competitive advantage. Furthermore, they may also be better placed to benefit from a likely long-term recovery. They may have a unique product, a dominant market position or lower costs than their sector rivals. This could all help their bottom lines to move higher at a faster pace.

Through owning the most attractive businesses within a sector, an investor’s risks may be lowered and their return prospects could be improved. Therefore, it may be worth analysing companies within a specific sector to unearth the most attractive purchases that can deliver the highest returns in the long run.

Warren Buffett has previously made relatively few purchases even during a market downturn. Therefore, it may be prudent to be selective when deciding which companies to buy. Doing so may lead to a better portfolio performance and a stronger recovery as the economy returns to positive growth in the long run.

The post How Warren Buffett’s strategy can help investors to capitalise on a market crash appeared first on The Motley Fool UK.

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Motley Fool UK 2020